German acquisition sets a new precedent

So it was all settled then. Last month in Frankfurt, late on a Friday, the supervisory board of Metallgesellschaft approved the takeover and statements were sent to the German stock exchanges. The mandatory electronic statement was not issued until Monday morning. The previous week the market had shown its expectations with a 17 per cent rise in Metallgesellschaft's share price. Something was going to happen. An official from Germany's trading authority that analyses trade volumes and prices said, `We are digging.'

Whatever the reasons for the controlled release of the takeover news, the acquisition of German engineering contractor GEA by Metallgesellschaft AG (MG) is something quite special.

MG says the deal is part of a `major strategic reorientation' in tune with its goal to transform from a raw materials conglomerate to a technology driven group. By 2001, MG plans to attract revenue of around £7.5 billion. A figure similar to last year but arising from a radically differing structure.

MG will acquire 74.85 per cent of common stock shares of GEA. GEA will be grouped with MG's existing Lurgi engineering group. MG will then divest the historical core metals division of its trade services group and its building systems group while the chemicals distribution business will be realigned with the chemicals group Dynamit Nobel. Finally 49 per cent of Ceram Tec, its ceramics business will be floated. This leaves behind two distinctive wings to the conglomerate; engineering and chemicals.

This is not just another takeover in a recent spate of acquisitions (see PE February). With each wing turning over sales of around £3.5 billion this is no sparrow. The new MG is a behemoth with the market muscle of an AMEC and ICI Speciality Chemicals merger.

After the company suffered losses of £670 million in 1993, a climbdown from industrial interests and a focus on high margin, technology driven services and products began in 1994.

Such a hybrid structure with complementary sectors offers potential benefits that set a precedent for the chemicals industry. MG has retained its profitable, high margin businesses while creating internal synergies between chemical manufacturing and contract engineering.

The engineering wing of Lurgi and GEA has its strengths in high technology process steps, plant contracting and plant fabrication. MG's Dynamit Nobel can gain substantial advantages with such a high level of technological expertise at hand.